5 Investment Opportunities in DeFi

5 Investment Opportunities in DeFi

The bigger DeFi gets, the more investors flock to DeFi, hoping to get a piece of the passive income pie. At its peak, in the last quarter of 2021, when DeFi had over $250 billion in locked value, investment in DeFi was its highest. 

This year’s bearish crypto market has affected the robustness of the DeFi market. Yet, investors still flock to DeFi for the opportunities it presents. 

Are you planning to invest in DeFi but don’t know where or how to start? Or are you an experienced investor looking to expand your investment portfolio? This article discusses five of the top DeFi investment opportunities in 2022.

DeFi Staking 

DeFi staking is considered one of the most popular investment opportunities in DeFi. Staking involves ‘locking’ the native tokens of a network to earn more of the native token as a reward. Note that staking only works for blockchains that use the proof-of-stake consensus method to validate blocks. Anyone can stake. In fact, the low barrier entry to DeFi investment is one of the reasons people flock to it. 

One of the ways to monitor your investments is by using a portfolio tracker like valktech.io. These portfolio trackers let you see how well or poorly your investments are faring. It also helps you to make profitable investments that are most likely to end in gains. As you begin your investment journey, take a portfolio tracker with you. 

However, the rules for staking differ from network to network. On some blockchain networks, potential investors have to stake a minimum amount of coins. In Ethereum 2.0, the minimum staking value is 32 ETH.

How do investors earn a reward from staking? 

When investors stake a native token, their tokens are locked in by a smart contract which is just a set of codes governing the network’s activities. The user then becomes one of the network’s validators. Network validators have a responsibility to the network to oversee the transactions and validate them. Successful validators are rewarded with some of the native tokens. 

Staking is very popular amongst DeFi investors, and here’s how you can start today. 

  1. Choose a DeFi Staking Platform;
  2. Purchase and deposit cryptocurrency funds for staking;
  3. Choose a validator;
  4. Earn staking rewards.

Be a Liquidity Provider 

Being a liquidity provider is another opportunity to earn passive income on DeFi. Liquidity providing occurs on decentralized exchanges (DEX) that offer cryptocurrency-swapping services. Each DEX supports currency swaps between two tokens, such as ETH and USDT. For DEXs to function, the exchange pool has to contain equal values of both crypto tokens. Anyone can contribute to this pool of tokens, and people who do are known as liquidity providers (LPs). 

Liquidity providers stake their tokens in the smart contract controlling the pool. In exchange for providing liquidity for the DEX, LPs get a percentage of the transaction fees for the swap in proportion to the number of tokens staked. 

Unlike DeFi staking, which might require a minimum number of tokens, liquidity providing doesn’t; and this makes it a great choice for new investors or investors who want to start small. 

The risk levels in liquidity are also few, with the biggest of them being impermanent loss, where LPs can lose money as a result of the volatility of some tokens. Being an LP for a DEX with more stable tokens reduces the chances of impermanent loss.

DeFi Yield Farming 

DeFi yield farming is a complex mixture of staking and liquidity, providing high rewards and corresponding risk levels. In DeFi yield farming, you stake tokens in a smart contract to provide liquidity in a liquidity pool. The liquidity pool then uses the staked tokens to provide liquidity for another DeFi protocol. The rewards from this second-tier investment are redistributed to the first-tier investors. 

For example, you and nine other users stake some ETH in a liquidity pool, and then the pooled tokens are invested in another DeFi protocol. The rewards from this investment are redistributed amongst you and the other nine users according to the amount of token you staked. 

One clear difference between yield farming and staking or liquidity providing is that your rewards can be in other tokens. You can start off investing in ETH and gain passive income in BNB.

DeFi Lending 

One of DeFi’s most successful services is peer-to-peer (P2P) lending. Not only has this service made loans accessible for borrowers, but it also opens an opportunity for lenders to make passive income. 

How DeFi lending works is that users lock their tokens into a smart contract that governs the liquidity pool. Borrowers can borrow from the users based on an agreement outlined and enforced by a smart contract. The interest rates and loan duration are outlined in the smart contracts, which also ensure the loans are paid by locking borrower’s collaterals. 

When the borrower pays, including the interest, users are paid an annual percentage yield (APY). The APY is an interest calculation that takes into consideration the effect of compound interest. 

Although smart contracts govern DeFi lending, there is still a risk of the borrower failing to pay the loan at the end of the loan duration. Compared to high-risk investments like yield farming, DeFi lending has an average risk.

Hodling DeFi Coins/DeFi Trading

Hodling is a term that anyone in crypto understands. If you’re new to crypto, hodling refers to the practice of buying tokens at a low price and selling at higher prices to make a profit. It is one of the commonest investment strategies on DeFi. 

While it seems straightforward, hodling doesn’t always guarantee a profit, especially with volatile tokens. The risks in hodling are high with uncertain moderate gains.

What Happens Next?

With so many investment opportunities, it can be tempting to jump right in and buy up DeFi tokens in the hope of making very successful investments. However, it’s important to pause and evaluate your investments, especially if you’re new.

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